Managing Private Wealth: 25 Questions of Business Owners (The One Percent Solution)

We have been asking questions as we proceed to develop The One Percent Solution.  However, a series of probing questions provides an excellent segue to our development of the concept.

The following is a list of 25 questions to think about in assessing whether you as an owner are treating your business as an investment.  If you are a business adviser, you can ask the questions on your clients’ behalf or, better still, in meetings with them.

1.  How much is your closely held or family business worth?

How much is your interest in the business worth if you own less than all of its shares (or other interests)?  Having asked the question, let me say that what you think doesn’t matter.  All that matter are: 1) what a buyer of capacity thinks if and when you are ready to sell your business; or, 2) what I or another qualified business appraiser thinks in the interim and will express in a valuation report for an ESOP, a buy-sell agreement, a gifting plan, for the estate of an owner, or whenever independent corroboration is needed for interim transactions.

2.  How do you know?  Has it been independently valued in the last three years?

If you’ve read my print book, Buy-Sell Agreements for Closely Held and Family Business Owners or my Kindle book, Buy-Sell Agreements for Baby Boomer Business Owners, you know I recommend that every successful closely held and family business have an appraisal each year, or at least every other year.

3.  What portion of your personal net worth is represented by your business ownership interest?

If you will just make a calculation with whatever estimate you have of your company’s worth in relationship to your other assets, you will likely be surprised at how concentrated your wealth is.  For Mr. Jones in our ongoing example, the answer is 80%, or quite concentrated.  What are the answers for you and for your other key owners?

4.  What has been your shareholders’ rate of return on their investment over the last one, two, three, four, or five years or more?

Return on investment (ROI) is not something that many private business owners talk about.  Simply, an investment in a business provides returns in two forms, interim distributions (after taxes) and capital gains, or the appreciation in the value of the investment each year and over time.  We will focus on ROI shortly.

5.  How does this rate of return performance compare with alternative investments, e.g., in the public securities markets?

You almost certainly know how your managed funds are doing. After all, you get a report from your manager at least every quarter, and perhaps more frequently. Have you ever compared your return on your business with that of your liquid wealth? You might be surprised, either pleasantly or not if you have the information.

6.  Is your wealth adequately diversified to avoid the risk of major losses from adverse events with any of your assets, including your business?

Rephrasing the question, if your business suffered a major loss of value, do you have sufficient assets outside the business to sustain a reasonable lifestyle?  For many business owners, the answer is no.  And for owners who build lifestyles based on their returns to labor (salary and benefits) and the economic distributions of their businesses, the answer is likely no.

7.  Do you know how to increase your company’s value over time?

You have been successful so far.  Do you know and are you working on things to do to increase the value of your business over time?  Even with large, highly successful businesses, significant enhancements in valuation can occur through efforts to reduce risk, to facilitate cash flow, and to use the balance sheet in a prudent manner.

8.  Are you working your way out of being a key person in your business?

What would happen if you went to the beach and didn’t come back? Have you designated someone to run the business in your absence or if you are unavailable? Steve Balmer, CEO of Microsoft didn’t do this before he announced his retirement.  Read this discussion of that debacle.

9.  How much money will you need to live the lifestyle you desire when you are no longer working and receiving a salary?

Pull out the calculator or have your financial adviser do it for you.  What income will be required to support you when you are not working in the business?  That’s pretty easy to figure, probably based on your current lifestyle.  How many dollars do you need invested at 4%, 5% or 6% such that you can generate that income from passive assets?

10. Does your business make economic distributions (in excess of those necessary to pay taxes)?

If your business is profitable and achieves a reasonable return on equity and is not growing very fast, then you should be able to make what I call economic distributions, or distributions after paying income taxes (assuming you have a pass-through entity).  These economic distributions become an ongoing source of accumulating wealth outside your business.

11. If not, is the return on your reinvestment of earnings into fixed assets or working capital or technology or whatever sufficient to warrant the investments?

If you are having to reinvest all of the company’s earnings and you are not growing steadily, something may be wrong and you are likely not achieving a reasonable return on your investment in the business.

12. Are you reinvesting distributions in assets in a plan to diversify your wealth?  If not, why not?

This point follows up on the previous question about distributions. It can be a mistake to believe that distributions are a part of your earned income and fully available to support lifestyle. Your business provides you with three forms of return if you work there.  First, you receive your salary, bonus and benefits. This is the return on your labor. Any distribution in excess of that, even if it comes in the form of a bonus, is the income return from your investment in the business. The final form of return is the appreciation in the value of your investment from year to year. Too often, owners in even substantial businesses do not make this important distinction between returns to labor and returns on investment.

13. What is the plan to obtain liquidity from your ownership of your business?

If your plan is to wait until some indefinite time in the future when you hope to sell the business, that may not be a plan but a wish. I hope you will read all of this book and begin to think about implanting some of the ideas to generate liquid assets from your business. The interim, i.e., the time between now and that indefinite time when you wish to sell, can offer lots of surprises.

14. What is the plan for the other shareholders, if any, to obtain liquidity from their investments?

Many successful closely held and family businesses have multiple shareholders, often with owners in different generations. This is true whether the owners are all family or not. Assume you are in charge with a significant stake. The point I made about distributions above holds true here. Minority owners not working in the business do not receive a return on labor from the business. But they are entitled to distributions or opportunities for liquidity at appropriate times. Share repurchases along the way can provide significant return enhancements for longer-term owners. But you have to realize that the other owners are, well, owners, and are entitled to their returns on investment just like you.

15. Are the plans for liquidity realistic and documented?

Do your other owners know about your plans? Does your family know about your plans? The Law of Unintended Consequences deals harshly with the unprepared. I have seen a number of businesses where the owner failed to take action prior to death. No one knows what to do. Following the loss of a key owner is most often not a good time to sell the business. Management transitions have to be accomplished by family or estates or others. Not a pretty sight….

16. Is your business “ready for sale” whether or not you have any interest in selling today or not?

When I talk about having a business “ready for sale,” I do not talk about necessarily preparing for an actual sale. Most business sales occur rather unexpectedly (see my comments above about a plan for liquidity). So if you might sell your business unexpectedly this year, next year, or the next year, why not keep it in a situation of readiness for sale? A business that is ready for sale has decent margins, is growing, lacks large customer or other concentration risks, and is focused on management and ownership transitions.  Why not be “ready for sale” all the time. I guarantee that a business in that ongoing state is a lot more fun and profitable to run than otherwise.

17. Are there things you know that need to done and that take time to begin to get the business in a position to be “ready for sale?”

This question could cause you to think about obvious concentrations in your business. If you have an overhang of stale inventory, get rid of it now so there will be no question later. If you need to train and appoint a successor COO, then be in the process of doing so.  It is so much easier to work on these and other issues on your own time. It is almost impossible when you are attempting to sell, and they will drag down value and proceeds.

18. What are the plans to transfer ownership and/or management to other members of your family or to others not in your family or in the family of a co-owner?

I asked what is the plan. Is there a plan for management transition? Is there a plan for ownership transition? Are these plans documented and to the right people know about them?

19. Are the ownership and management transition plans realistic?  Do those you are thinking about know about and agree with your plans?

You know what your stock ownership is currently.  What do you and other key owners think that the ownership distribution should be in one year, two years, or five years. It won’t change by chance. Regarding management transitions, it is far better to move them along sooner rather than later in most instances. The longer your business is highly dependent on you or you and a partner or two, the harder it will be to change as time progresses.

20. Does your company have a buy-sell agreement?  If so, how do you know that it will work if or when it is triggered?

If the buy-sell agreement has a fixed price, is it realistic and current? How do you know? If the plan depends on a formula to price agreement transactions, is the formula realistic in current market and financing conditions? Has anyone calculated it recently?  What are the provisions for adjusting the formula for known issues like non-recurring costs or income items? If the plan calls for multiple appraisers, do you know what will happen when it is triggered? Most buy-sell agreements are ticking time bombs and will likely not provide reasonable resolutions. My suggestion to the owners of successful closely held and family businesses is that they revise their buy-sell agreements such that they agree to the following. Select a single appraiser now. Have that appraiser provide a draft appraisal now. All parties review the draft now to be sure that the appraiser has interpreted the valuation language the way the owners are thinking, and then finalize the valuation. This becomes the price for the agreement until the next reappraisal, which establishes a new price. And so on. I recommend this because it works. It avoids confusion, litigation and angst when trigger events occur. It provides certainty as to the process. For the quickest look at the details purchase Buy-Sell Agreements for Baby Boomer Business Owners for your Kindle.

21. If there is life insurance associated with a buy-sell agreement, are the instructions within the buy-sell agreement and in any related documents clear as to how any proceeds of life insurance proceeds will be treated for valuation purposes?

Life insurance can be considered as a funding vehicle. If so, the insurance proceeds are not considered part of company value and are used to acquire the stock of a deceased owner. Life insurance proceeds can also be considered to be a corporate asset. Under this treatment, the proceeds are added to value dollar-for-dollar before the per share price for the estate is determined. The choice of treatments can make a substantial difference in results for a selling shareholder, the company and the remaining shareholders. My short point here is simple. If there is life insurance associated with your agreement, be sure that the agreement specifies its use in unambiguous terms. If the treatment is ambiguous or not present in the agreement, there will almost certainly be disagreement between the estate and the company and other owners. It is easier to agree when all the parties are in the here and now. It is virtually impossible to agree when one of the parties is in the hereafter.  (See

22. Is your will current and does it reflect your current intentions for what happens in the event of your death?

I am not an estate planner, but this is a basic issue. The time of one’s death is tough on the family. It is sad to compound their grief and angst with a will that does not represent your current desires or promises to your family. Not to mention, the state of your will and planning can have an enormous impact on your estate’s tax liability.

23. Do you know what you want to do the day after you sell the business or retire?

This is a bigger question than you might imagine.  Many Baby Boomers will defer retirement or full retirement for a number of years.  However, when owners sell, the likelihood of their being on for very long after the sale seems to be fairly low. Once your out, what will you do?  Will you want to work for one or more nonprofits? Get attached now, while you are active and attractive.  Want to do something for your church? Work with the pastor or administrator to get it defined before you are ready and you can work into it. Want to do something fun in a non-competing business? You might want to get something started now. Whatever it is you want to do, it is best to be thinking now about it and positioning yourself so that you can walk into that next portion of your life. If not you may find yourself bored and unemployed. That’s not healthy.

24. Who are your trusted advisers who are assisting you with your will, your gift and estate tax planning, your succession planning, retirement planning, your buy-sell agreement, and so on?

Do you have a team? Is there a quarterback for the team? Does your family know the team? Are you working with them on an ongoing basis to assure that your management and ownership transitions will go smoothly and that your estate tax planning and “life after work” plans are well underway? If not, it is probably time to get started.

25. Are you comfortable with the state of your planning for the your future and the future of your family?  Or are you vaguely or specifically uncomfortable with the state of your affairs?

If you are vaguely or specifically uncomfortable, now is the time to take action. If you are comfortable, chances are that you are already working with a professional team.


The 26th question is a bonus:

How can anyone answer the first 25 questions or get others to help answer them?  The answer lies in making one simple decision – to treat your investments in closely held businesses as the important investments they are.  Business owners pay significant fees to the people who manage their liquid wealth because that wealth is treated as an investment.

The One Percent Solution for Managing Pre-Liquid Wealth is based on the premise that owners of closely held businesses should treat their ownership interests just the same way – as important investments.  And now, we get to the heart of the simple concept of The One Percent Solution.

Please note: I reserve the right to delete comments that are offensive or off-topic.

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